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In today’s business world, the manufacturing business utilizes raw ingredients to produce finished products that can be offered to consumers directly (Wang et al., 2020). Germany is an important and powerful player in the international economy based in “Western and Central Europe”. This report aims to analyse the business environment of Germany for a UK-based manufacturing SME "The Wheat Bag Company" that aims to enhance its business operations in Germany in 2021. This report is based on expansion opportunities for The Wheat Bag Company in the German market by considering macro-environmental factors impacting the business. Further, this report analyses the key market entry mode in Germany for The Wheat Bag Company.

The chosen company for this report is The Wheat Bag Company UK. The company makes and creates beautifully crafted microwavable wheat bags which are natural, therapeutic pain relief. The products offered by the company include wheat bags, Padi pillows, door stops, essential oils, and lavender sachets, face masks, etc. Germany's market is an immaculate opportunity for The Wheat Bag Company to expand its reach. With a population of 82.4 million consumers, Germany currently sets itself as the largest and most influential consumer market in the European Union. Being an important member of the EU “European Union”, Germany has the largest economy among all European states (Motohashi and Rammer, 2020). Around 3.8 trillion dollars GDP of Germany represents around 21% of the overall GDP of the European Union (World Bank, 2021). 

Figure 1 European Market for Cosmetics

Source: Cosmetics Europe (2020)

The market of natural cosmetic products is still vigorous and gives opportunities to offer products at premium prices. The choice of the consumer depends on the ingredients used in the formula of cosmetics and its naturalness (Morea et al., 2021). The personal care and cosmetic sector experienced significant growth in the year 2017. The increasing purchasing power and aging population of Germans have increased sales of specific departments. Germany is considered the largest cosmetic products market within Europe (14 billion euros). The essential oils market is growing in Germany and further growth is expected to continue at a steady pace in the coming years. The Figure below shows that Germany is the leading European importer of essential oils (CBI, 2019).

By attracting foreign investments, establishing intangible assets such as brands, and capitalizing in R&D, the personal care sector is aiding Germany to increase the competitiveness and value of its economy and also contributing to the country's future prosperity (Podgórska et al., 2021). Thus, providing an opportunity for The Wheat Bag Company to enter Germany to increase its sales and enhance its market share. Following are the reasons for expansion of The Wheat Bag Company to enter in Germany.

The industry of personal care has been experiencing a revolution with swiftly changing perceptions of customers towards beauty products. They are now more interested in the product's benefits and ingredients. This interest of customers has enhanced their awareness about various harmful chemicals utilized in conventional cosmetics or beauty products and has increased the demand for organic beauty products. Consumers of Germany now admire the benefits of using organic skincare products and are willing to purchase natural products at high prices (Whitehouse, 2018).

Nowadays, consumers are more conscious of their health. Increasing customer preferences towards natural personal care goods have led to the enhancement of innovative practices in the area of beauty and skincare products. Increased disposable income and rapid industrialization are the crucial drivers behind the production of essential oils (Zhang and Zhou, 2019). In Europe, these oils have a huge import market.  Around 87,000 tonnes of this essential oil has been imported in 2017 by European states. In Europe, Germany has the biggest market of natural cosmetics worth 1.3 billion euros in 2018 (Statista, 2020).

The essential oils sales depend on consumer's education. The sales would be high when consumers are aware of the use of essential oils. A common example that indicates the influence of sector operations on market sales is Aromatherapy. This market depends on both personal (individual customers) and professional (aromatherapists) usage for its purchases. One of the main natural ingredients of their products is an essential oil and the availability of various essential oils allows them to add new flavourings to their goods (Barbieri and Borsotto, 2018).

When compared with several other sectors, natural cosmetics and personal care in Germany remains the biggest market with a turnover rate of 1.2 billion euros. Data of market research highlights that the share of other European markets in this sector is just 0.8 billion euros. However, the market of conventional cosmetics grew by 0.5% to 13.6 billion last year in Germany with 83% total market share, a segment of nature-based cosmetics grew by around 2% with 8.2% market share and natural cosmetics by 3% with 8.8% total market share. Even though 7.9% more organic personal care products have been sold the previous year in Germany but the turnover rate was just 3% higher (Vivaness, 2019).

European customers of natural goods utilize standards of quality management while evaluating the credibility of potential exporters (Topolansky Barbe et al., 2017). Using the standards of quality management will provide reliability to "The Wheat Bag Company" as it indicates the company's commitment towards quality ingredients and the favorable image of the company. It also shows the company's commitment to mandatory requirements. The company can also consider standards of quality management to enhance essential oil quality and to make it more attractive to buyers (Romero et al., 2018). "Good Agricultural and Collection Practices (GACP) and Good Manufacturing Practices (GMP)" formulated by European Federation indicates the good quality offering by the company. The Wheat Bag company should also consider adopting ISO 22000, ISO 9001:2015, and hazard analysis systems to improve quality.

The industry of personal care, cosmetics, and beauty have been considered recession-free but the exclusive economic, social, and legislative factors that surround consumption patterns in this COVID-19 period have posed serious challenges to the personal care industry in 2020 as the consumptions patterns, and beauty routines have changed dynamically. The flexible nature of cosmetics along with lockdown measures travel restrictions and closure of retails exposed them to economic collapse (Gerstell, 2020).

According to the baseline scenario of Euromonitor (2020), global sales of personal care products have been declined by 2.0% in 2021 as compared to its growth of 1.9% in 2019. By considering the current uncertainties due to COVID-19, Euromonitor has given a sequence of future circumstances as well. According to scenario 1, the sales of the personal care industry may decrease by 2.7% globally, however, the other 2 scenarios forecast a decrease of not more than 4.0% in the year 2021.

Various trends that influenced the personal care and beauty sector in 2019 have enlarged in 2020, and after it:

1.      The pandemic of coronavirus is enhancing micro trends related to wellness. Health has been considered a basic priority. The movement of "clean to conscious" will be emphasized as customers are aware of the fact that natural product doesn't mean better. And they are opting more personalized approach for their skincare. Customers now search for products that are strongly aligned with immunity, health, therapeutics, safety, and wellness (Villena, 2020).

2.      Moreover, channel diversification, as well as digital engagement, has become more crucial. Present e-commerce interferences have prepared various beauty contestants for a significant movement towards this channel. Sales of the personal care sector have been enhanced by 19% CAGR via e-commerce from 2014-2019, encouraged by the increase in various digital tools. Players in the beauty industry must try to establish an effective virtual experience for experience while strengthening new sales points on social media (Wang, 2020).

Source: Euromonitor (2020)

3.      The pandemic of the corona has significantly influenced the cosmetic industry of Europe. Besides affecting sales, it also influenced the movement of raw materials. The supply chain has been disrupted due to lockdowns in several regions of the world and flight cancellations have also enhanced freight costs (Pantelimon et al., 2020).

4.      Some cosmetic firms that source the material directly from producers have less influence. A natural personal care company of Germany highlighted that they didn't face a shortage of raw material as they have direct contact with small producers. Moreover, personal care firms that source material locally was less influenced by these issues. The pandemic has highlighted the significance of supply chains for cosmetic companies (Mizik et al., 2020).

Germany is the country that attracts FDIs "Foreign Direct Investments", however, the Eurozone crisis, as well as the global recession, has hindered the FDI influx in Germany in past few years (Lomachynska et al., 2018). The below-mentioned statistic highlights the inward flow of FDIs from the year 2012 to 2019 in Germany. OECD highlighted the stock of foreign direct investments as the amount of total direct investments within a country at a specific time, generally the end of a year. In the year 2019, the total value of the stock of inward FDI in Germany was around the US $1.02 trillion (Statista, 2021).

Source: Statista (2021)

In Germany, the inflow of FDI has lessened as compared to the FDI of the previous year. It is due to the ambiguity caused by the tax reforms of the US and Brexit, a strict labor market along the COVID-19 outbreak. The major direct investments in Germany are done by Switzerland, the UK, Netherlands, the US, and Luxembourg, which indicates around 60% of the total FDI. While in Germany FDIs have been enhanced by 17320.51 EUR Million in June of 2021 (Trading Economic, 2021).

Germany supports and persuades "Foreign Direct Investments". Germany has certain legislations regarding FDI that support the principle of foreign trade liberty and payment transactions freedom as illustrated in the act of "foreign trade and payments" (Economou, 2019). This FDI act allows FDI restrictions due to national security, foreign policy, and foreign exchange. However, these restrictions are hardly implemented. The German imports don't need any control declaration or specific permit. It applies to German companies, partnership firms, and residents as well, with a listed German office (Hussain et al., 2021). The government of Germany supports FDIs by giving financial loans to companies that invest in R&D, tax deductions, and special incentives that depend on the area in which the investor wants to invest, however, the government permits the foreign investors to invest in any sector. The major strengths of Germany include a diverse and strong industrial network, a competent workforce who have good command over English, a feasible social climate, a strong and steady legal framework, positioned at the "heart of Europe", and reliable infrastructure (Havlik et al., 2018). For “The Wheat Bag” company it would be feasible to invest in Germany as there is zero favouritism or discrimination regarding registration or taxation system between local and foreign firms. In Germany, the system of taxation is much competitive as compared to the taxation system of various other member states of the EU. The corruption level of the country is minimum that is the best thing for foreign investors. Moreover, foreign investors can buy properties in Germany without the fear of being stolen. In addition, foreign investors can maximize their shareholding/ investment in a German firm (Wagner, 2021).

According to information published by the "Federal Statistics Office" of Germany, the volume of waste produced by the country in 2019 was around 23.9 million tonnes. Over 67 % of total waste has been recycled in Germany. The programs of waste management, reusing and recycling have been growing in Germany (Federal Statistics Office Germany, 2020). The country has also transformed a huge percentage of the electricity depletion to renewable sources of energy. Germany's success regarding waste management strongly depends on two factors: recycling and effective government policies (Kumar and Samadder, 2017).

The government's policy regarding waste aims to accomplish a recycling-centered economy that not only conserves resources but also reduces the negative impact of waste on the environment. The objective is to enhance efficient utilization of raw materials, enhance waste recovery quotas, and eliminate residual waste permanently from the environment (Aparcana, 2017). The legislation regarding waste management is based on regional law, European law, the federal law of Germany, and laws of local waste management authority. Following are some waste management policies of Germany (Brassaw, 2017).

Packaging Ordinance: This policy formulated in 1991 has made the manufacturers liable for the recycling and reusing of their packaging material after being consumed by customers. It includes transportation packaging, primary (e.g., soda can), and secondary packaging (e.g., box on soda can) (Brassaw, 2017).

Closed Substance Cycle and Waste Management Act: This act formulated in 1996 says that anyone who produces or consumes goods are responsible for reusing, recycling, and disposing of the material. This act specifically targets producers and motivates them to utilize any of these strategies of waste management: waste recovery, environmentally friendly disposal, and waste avoidance. Thus, businesses should avoid producing waste, recycle any produced waste and dispose of waste in an environmentally friendly way (Brassaw, 2017).

The Green Dot: A green dot printed on packaging material indicates that it can be recycled. German manufacturers pay a specific fee to “Dual System Germany” DSD according to their packaging and use green dot by permission of DSD. Organizations that use green dot have to obey all recycling laws (Brassaw, 2017).

These three policies have not only enhanced recycling in Germany but have also established a recycling culture among German citizens. Germany has become an enormous example of an effective waste management region. The citizens of Germany utilize renewable energy sources and recycle waste (Weber and Cabras, 2017). The German people desire to establish a greener future by recycling and reusing waste. The cosmetic goods of Germany are exposed to November 30, 2009, regulation of Europe "(Regulation (EC) No 1223/2009)". Moreover, the cosmetic good's composition has to be declared to the BVL "Federal Office for Consumer Protection and Food Safety". A new packaging law "VerpackG" formulated on July 5, 2017, and enforced on January 1, 2019, emphasize the current laws regarding recycling of waste produced by packaging material. It forces new packaging producers to register with national packaging (Ashraf et al., 2020). These laws should be taken into consideration when entering Germany by The Wheat Bag Company.  

Businesses can utilize various modes to enter into a specific market depending on the potential risks, resources they require, profitability, and degree of control. The different modes of entry include exporting, licensing, franchising and joint venture, etc. However, The Wheat Bag Company can utilize exporting to successfully penetrate the German market. Exporting is recommended to the company as it is the best mode to conduct business in Germany (Panibratov et al., 2018). The risk associated with exporting is also very low. Exporting allows The Wheat Bag Company to sell its products in a way that is attractive to locals of Germans. Exporting is a traditional and well-established mode of penetrating the market of Germany. Moreover, the organization will not have to make any foreign direct investments for production as goods will be manufactured in the host country's lands. The expense of marketing will be the highest cost associated with exporting in the foreign market (Bugamelli et al., 2018).

The company can produce goods in bulk and can accomplish the advantage of large-scale manufacturing by exporting to the market of Germany. The high-scale production will allow the Wheat Bag Company to reduce its distribution, marketing, and advertising cost per unit. Moreover, exporting involves low cost as well as low risk which makes it easy for the company to sell its products in the market of Germany (Neubert, 2018). The firm local competitiveness level will also be enhanced by international operations. By exporting its goods to the German market, the company will achieve a competitive edge and increased productivity. The Wheat Bag Company will accomplish diversification in its business operations in the German market which will enable the company to face less risk than the firms which don't export. Cons of exporting will include Operational difficulties where The Wheat Bag Company will have a low degree of control of German market operations. It is because the company will depend on local middlemen in ensuring that goods and services are distributed and are available in foreign markets. It will also be challenging to ensure that the activities of the company and its intermediaries are directed towards achieving the set goal (Stoian et al., 2018).

Considering Germany's prospering and strong economy, foreign direct investment policies, changing consumer demand, and waste management policy of government it makes it an optimal destination for The Wheat Bag Company to expand to. The economic conditions are set to where The Wheat Bag Company is presented with various business opportunities and offers many incentives for the business, attracting foreign investors. Germany's location is also ideal as it presents more trade opportunities with its neighboring countries. In conclusion, The Wheat Bag Company should consider expanding their business into Germany for an optimal foreign expansion and will build and benefit the business tremendously. The policy of Germany regarding foreign investments is quite liberal. The country considers these investments as crucial components of Germany's economic development. However, in past years, the German policy towards foreign direct investments has become quite restrictive in specific areas but will be favorable for The Wheat Bag Company.

         Natural products in the cosmetics and personal care industry are in great demand among German citizens. The Wheat Bag Company can manufacture and sell its Wheat bag and essential oils in Germany along with new products such as organic soaps and candles etc.       To reduce the impact of COVID-19 on future sales and business operations, it is recommended for The Wheat Bag Company to work with local suppliers for a smooth flow of business.          The foreign investors in Germany are allowed to buy business properties which is a good sign for an SME like The Wheat Bag Company. By purchasing small property in Germany, The Wheat Bag Company will be able to cut its costs of rental.          There is a great focus of the German government on waste management and recycling of products. The Wheat Bag Company can offer services by minimizing waste so that customers can use it without any discomfort and harm in society.

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